Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD5190 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT PAPER ON A RESTRUCTURING AND THIRD ADDITIONAL FINANCING LOAN IN THE AMOUNT OF US$529.9 MILLION TO UKRAINE FOR A Third Additional Financing for the Public Expenditures for Administrative Capacity Endurance in Ukraine (PEACE in Ukraine) Project September 19, 2022 Governance Global Practice Europe And Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective August 31, 2022) Currency Unit = Ukraine Hryvnia (UAH) US$1 = UAH 36.92 SDR 1 = US$1.30 FISCAL YEAR January 1 - December 31 Regional Vice President: Anna Bjerde Country Director: Arup Banerji Regional Director: Lalita M. Moorty Practice Manager: Daniel J. Boyce Oleksii Balabushko, Ana Bellver Vazquez-Dodero, Karlis Task Team Leader(s): Smits ABBREVIATIONS AND ACRONYMS AF Additional Financing AM Accountability Mechanism DCM Department of Coordination and Monitoring DSE Department of Social Expenditures ESCP Environmental and Social Commitment Plan GDP Gross Domestic Product GMI Guaranteed Minimum Income GoU Government of Ukraine GRM Grievance Redress Mechanism GRS Grievance Redress Service HUS Housing and Utilities Subsidy IBRD International Bank for Reconstruction and Development IDA International Development Association IDP Internally Displaced Persons IP Implementation Progress MDTF Multi-Donor Trust Fund MoES Ministry of Education and Science MoF Ministry of Finance MoH Ministry of Health MoSP Ministry of Social Policy NBU National Bank of Ukraine NHSU National Health Service of Ukraine PDO Project Development Objective PEACE Public Expenditures for Administrative Capacity Endurance PFU Pension Fund of Ukraine PFM Public Financial Management PMG Program of Medical Guarantees POM Project Operational Manual SEP Stakeholder Engagement Plan SES State Emergency Service SSN Social Safety Net STS State Treasury System ToC Theory of Change WBG World Bank Group Ukraine Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine TABLE OF CONTENTS I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING ........................................ 8 II. DESCRIPTION OF ADDITIONAL FINANCING .................................................................... 13 III. KEY RISKS ..................................................................................................................... 15 IV. APPRAISAL SUMMARY .................................................................................................. 17 V. WORLD BANK GRIEVANCE REDRESS .............................................................................. 25 VI. SUMMARY TABLE OF CHANGES .................................................................................... 26 VII. DETAILED CHANGE(S).................................................................................................... 26 VIII. RESULTS FRAMEWORK AND MONITORING ................................................................... 28 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) BASIC INFORMATION – PARENT (Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine - P178946) Country Product Line Team Leader(s) Ukraine IBRD/IDA Oleksii Balabushko Project ID Financing Instrument Resp CC Req CC Practice Area (Lead) P178946 Investment Project EECG1 (9750) ECCEE (1607) Governance Financing Implementing Agency: Ministry of Finance ADD_FIN_TBL1 Is this a regionally tagged project? No Bank/IFC Collaboration No Expected Approval Date Closing Date Guarantee Environmental and Social Risk Classification Expiration Date 07-Jun-2022 31-Mar-2023 Substantial Financing & Implementation Modalities Parent [ ] Multiphase Programmatic Approach [MPA] [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [✓] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country [ ] Project-Based Guarantee [✓] Conflict [ ] Deferred Drawdown [✓] Responding to Natural or Man-made disaster Sep 02, 2022 Page 1 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) [ ] Alternate Procurement Arrangements (APA) [ ] Hands-on Expanded Implementation Support (HEIS) Development Objective(s) To contribute to sustaining the government administrative and service delivery capacity to exercise core government functions at the national and regional levels Ratings (from Parent ISR) RATING_DRAFT_NO Implementation Latest ISR 13-Jun-2022 06-Jul-2022 05-Sep-2022 Progress towards achievement of PDO S S S Overall Implementation Progress (IP) S S S Overall ESS Performance S S S Overall Risk H H H Financial Management S S S Project Management S S S Procurement S S S Monitoring and Evaluation S S S BASIC INFORMATION – ADDITIONAL FINANCING (Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine - P179875) ADDFIN_TABLE Urgent Need or Capacity Project ID Project Name Additional Financing Type Constraints P179875 Third Additional Financing Cost Overrun/Financing Gap Yes for Public Expenditures for Administrative Capacity Endurance (PEACE) in Sep 02, 2022 Page 2 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Ukraine Financing instrument Product line Approval Date Investment Project IBRD/IDA 30-Sep-2022 Financing Projected Date of Full Bank/IFC Collaboration Disbursement 30-Jun-2023 No Is this a regionally tagged project? No Financing & Implementation Modalities Child [ ] Series of Projects (SOP) [✓] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [✓] Fragile within a Non-fragile Country [ ] Project-Based Guarantee [✓] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made disaster [ ] Alternate Procurement Arrangements (APA) [ ] Hands-on Expanded Implementation Support (HEIS) [ ] Contingent Emergency Response Component (CERC) Disbursement Summary (from Parent ISR) Net Source of Funds Total Disbursed Remaining Balance Disbursed Commitments IBRD 492.00 481.36 10.47 98 % IDA 1,000.00 113.54 856.82 12 % Grants 5,800.00 5,800.00 100 % PROJECT FINANCING DATA – ADDITIONAL FINANCING (Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine - P179875) Sep 02, 2022 Page 3 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFi n1 SUMMARY (Total Financing) Proposed Additional Total Proposed Current Financing Financing Financing Total Project Cost 8,942.00 3,580.00 12,522.00 Total Financing 7,292.00 529.90 7,821.90 of which IBRD/IDA 1,492.00 529.90 2,021.90 Financing Gap 1,650.00 3,050.10 4,700.10 DETAILS - Additional Financing NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 529.90 COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [ ✔ ] No Does the project require any other Policy waiver(s)? [ ] Yes [ ✔ ] No Sep 02, 2022 Page 4 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) ESStandards Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance Assessment and Management of Environmental and Social Risks and Impacts Relevant Stakeholder Engagement and Information Disclosure Relevant Labor and Working Conditions Relevant Resource Efficiency and Pollution Prevention and Management Not Currently Relevant Community Health and Safety Relevant Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Not Currently Relevant Biodiversity Conservation and Sustainable Management of Living Natural Not Currently Relevant Resources Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities Cultural Heritage Not Currently Relevant Financial Intermediaries Not Currently Relevant ESStandardsNote NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). INSTITUTIONAL DATA Practice Area (Lead) Governance Contributing Practice Areas Macroeconomics, Trade and Investment Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Sep 02, 2022 Page 5 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader (ADM Oleksii Balabushko EECG1 Responsible) Ana Bellver Vazquez- Team Leader EECG2 Dodero Karlis Smits Team Leader EECDR Procurement Specialist (ADM Dmytro Donets EECRU Responsible) Barbara Ziolkowska Procurement Specialist EECRU Financial Management Iryna Babich EECG1 Specialist (ADM Responsible) Social Specialist (ADM Mariia Nikitova SCASO Responsible) Environmental Specialist (ADM Oksana Rakovych SCAEN Responsible) Anastasiia Golovach Team Member EECM2 Andrianirina Michel Eric Team Member WFA WFACS Ranjeva Daria Gulei Team Member ECCUA Iryna Shcherbyna Team Member EECG1 James Gresham Team Member HECED Kateryna Petryna Team Member HECSP Ma Dessirie Kalinski Team Member WFA WFACS Maya Abi Karam Team Member Legal LEGLE Oleksiy A. Sluchynskyy Team Member HMNSP Sidet Kim Team Member Operations EECG1 Tehmina Shaukat Khan Team Member EAEM2 Extended Team Name Title Organization Location Sep 02, 2022 Page 6 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Sep 02, 2022 Page 7 of 37 I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING A. Introduction 1. This Project Paper seeks the approval of the World Bank’s Executive Directors to provide additional financing in the amount of US$529.9 million for a Third Additional Financing (Third AF) to Ukraine for the Public Expenditures for Administrative Capacity Endurance (PEACE) Project . The Third AF will be financed by a loan in the amount of US$529.9 million equivalent guaranteed by the United Kingdom (guarantee amount of US$500 million) and the Kingdom of Denmark (guarantee amount of EUR 30 million). 2. The original project is a US$1.492 billion Investment Project Financing (IPF), financed by a EUR 946.6 million (US$1 billion equivalent) non-concessional IDA credit and EUR 465.96 million (US$492 million equivalent) IBRD loan, guaranteed by the Netherlands, Latvia, Lithuania, and the United Kingdom. The project was approved by the Executive Directors on June 7, 2022, with a closing date of March 31, 2023. The Project became effective on June 18, 2022. The Project Development Objective (PDO) is to contribute to sustaining the government administrative and service delivery capacity to exercise core government functions at the national and regional levels. The Original Project reimbursed government expenditures for salaries of government and school employees. Progress towards achievement of the PDO and Implementation Progress (IP) are both rated Satisfactory in the third Implementation Status Report of the Parent project (September 1, 2022). All other ratings are satisfactory. As of August 31, US$481 million equivalent has been disbursed from the loan, and US$114 million equivalent from the credit. 3. Two additional financing grants have been approved for a total amount of US$5.8 billion . The First additional financing (AF) was approved on June 26, 2022 (P179344), for US$1.3 billion of grant funding and is fully disbursed.1 The Second AF was approved on August 2, 2022 (P179456), for US$4.5 billion of grant funding. The Second AF introduced support to additional types of expenditures incurred by the government to pay pensions, social assistance, wages of first responders and deliver healthcare services, and updated the economic, financial, technical analyses and results framework to fully reflect the impact of the new activities. Under the Second AF, US$3 billion was disbursed on August 24, 2022, and US$1.5 billion was disbursed on September 16, 2022. The Project continues to remain in compliance with environmental, social, audit and financial management reporting requirements. 4. The proposed Third AF will further scale up the activities of the project, extend the closing date by three months and update the economic, financial, and technical analysis. The Third AF will expand the scope of the Project by providing additional financing for eligible government expenditures incurred during August-October 2022.Concurrently with the Third AF, the project closing date will be extended by three months, with a new closing date of June 30, 2023. As the financing needs are large and likely to persist well into next year, and the Project would likely receive new grant financing or new guarantees to meet these, the larger estimated financing gap and extended closing date will create space to provide support to sustaining government capacity and protecting the vulnerable through social assistance programs and pension payments beyond the current closing date of March 31, 2023. The processing of AF was contemplated in the Project Appraisal Document of the parent project. As a result of this Third AF, a Level 2 restructuring is also proposed to extend the closing date, update project costs and disbursement arrangements. 1 Disbursement was partly as an advance, for which all expenditures have not yet been submitted for verification and review. Sep 02, 2022 Page 8 of 37 B. Rationale 5. Russia’s invasion of Ukraine on February 24, 2022, has had devastating economic consequences. According to official statistics Ukraine’s gross domestic product (GDP) shrank by 19.3 percent (quarter- on-quarter seasonally adjusted) in Q1 2022, with a steeper decline expected in Q2. The outlook for 2022 is currently being revised and will be included in the regional economic update that will be issued ahead of the Annual Meetings. Inflation increased to 21.5 percent (year on year) in June due to supply disruptions and increased production costs caused by extensive damage to production facilities, interruptions to logistics networks, and displacement of employees. Consumer prices are expected to increase further due to the supply side shocks and increased depreciation expectations of Ukraine’s currency. With the war continuing, Ukraine is facing a number of macro-critical challenges: (i) high fiscal financing needs and inability to mobilize domestic revenues; (ii) increasing reliance on monetary financing; (iii) deteriorating asset quality of the financial sector; and (iv) a weak external position. 6. Ukraine’s public finances remain under severe pressure, with disbursement of external donor financing only partially covering the financing needs. Monthly tax revenues have dropped by nearly half relative to pre-war levels, even as spending needs have sharply risen. For the year 2022, General government’s revenues are expected to drop by 45 percent due to both: a sharp deceleration in economic activity and tax policy changes (when the war began, the government introduced tax holidays for some taxes, including import duties). From July 1, 2022, import duties were re-established at the pre-war level, which are expected to support fiscal revenues going forward. At the same time, given the prolonged war, fiscal revenues are expected to remain depressed for a considerable period even after the war ends. Non- military financing needs to maintain critical public and social services amounted to US$11 billion equivalent in Q2 and are estimated at US$15.4 billion in the second half of the year, including expenditure for gas purchases for the heating season. Moreover, starting from September the government may face an urgent repair and reconstruction need, estimated at additional US$3.4bn. The government is trying to reduce financing needs. In August 2022, the government successfully completed its external liability management transaction related to a two-year freeze on payments on its Eurobonds (US$19.6 billion). This followed on the initiative to suspend debt service payments of major official bilateral creditors for Ukraine till the end of 2023 with the possibility to extend the suspension by one more year. Due to delays in international financing during April-June, Ukraine had to rely on domestic sources to meet its urgent fiscal needs. The National Bank of Ukraine (NBU) has already monetized over US$8.5 billion in fiscal needs since the beginning of the war. If monetization of fiscal needs continues, inflationary pressures will continue to build and will become increasingly difficult to bring under control going forward. 7. The war resulted in immediate balance of payments pressures through several channels. First, due to the blockade at Black Sea ports, Ukraine almost fully lost its ability to export grain and other agricultural commodities. In August, the United Nations brokered a grain export corridor, which was established to allow resumption of exports of agricultural commodities through the Black Sea ports. However, war export of goods would remain depressed, declining almost by half (in both month-over- month and year-over-year terms). This may lead to significant broadening of the current account deficit in the second half of 2022, as imports have already started to recover in May-June. Second, huge outflows of refugees have created capital account pressures due to withdrawal of FX funds from their Ukrainian accounts to finance their spending abroad. In the absence of balance of payments support, these pressures will continue to build. In response to growing pressures on FX, on July 21, the National Bank of Ukraine changed the official, fixed exchange rate to UAH36.6/US$1, a 25 percent increase from the UAH29.25/US$1 maintained from the beginning of the war. The NBU had been actively intervening to Sep 02, 2022 Page 9 of 37 defend the exchange rate, using approximately US$12 billion since the beginning of the war. In recent months, this has led to an accelerating reduction in international reserves, to US$22.4 billion in July, down from US$29 billion prior to the war. Together with the increase in the policy interest rate to 25 percent, the NBU expects this measure to reduce demand for foreign exchange. 8. The Ukrainian banking system entered the war in a relatively good condition. The war is expected to affect banks’ asset quality and solvency. The electronic payment system infrastructure has remained fully operational since the start of the war and about 87 percent of bank branches remain operational as of mid-June. Liquidity remains at sufficient levels, given a relatively stable deposit base and refinancing support from the NBU. Recent amendments introduced a blanket guarantee for retail deposits and brought Oschadbank – a state-owned bank - under the deposit guarantee system. At the same time, loss of assets, collateral, and revenues will severely affect banks' profitability and solvency. During March- July, the banking sector already accounted for US$1.9 billion (UAH 68 billion) for expected war-related credit losses. While some banks will be able to recover capital themselves through their future profits, others will likely need to be recapitalized by their shareholders. 9. In response to the Government of Ukraine (GoU) request on August 15, 2022, the proposed Third AF provides further support to core government functions at the national and regional levels. The PEACE project provides funding to cover the wage bill of non-security sector government employees, pensions, social payments, and education, emergency and healthcare services that are essential to ensure continuity of core government functions and mitigate the social and economic impact of the war. 10. Government spending on core public services and social payments for the duration of the project is vast and remains considerably larger than the amount of financing available (see Table 1). The expenditure estimates presented in the Table 1 are USD equivalent and are based on historical data and government estimates. The expenditures will fluctuate and could be lower should devaluation of local currency occur. This Third AF will scale up this support by increasing the amount of eligible expenditures reimbursement to up to 100 percent of eligible expenditures under Components 2 and 3 of the Project, and cover US$529.9 million of these expenditures incurred by the government August-September. The development partners are ramping up planned support to Ukraine with the EU announcement of EUR 5 billion2 in budget support and US request of USD 4.5 billion in economic support,3 but the needs continue to persist over the medium term. 11. From the beginning of the war, the Government sustained its core services and social payments. Including with support from the PEACE project, in July 2022 7.98 million pensioners have received their pensions our of estimated 8 million with pensions accrued. Most of the remaining 200 thousand pensioners are likely to receive it later with delays related to the ability of the postal service to deliver pension payments in war affected areas. Over 95 percent of social assistance beneficiaries also received their payments on time in June and July of 2022. Education services continue to be delivered with the MoES reporting on August 31 that, out of 12,900 schools starting the new academic year on September 1, 42 percent would operate remotely, 30 percent would operate in a blended mode and 28 percent would provide in-person classes. Strong regional differences are expected. For instance, only 12 percent of schools in Odeska oblast will provide in-person classes on September 1, while this figure goes up to 55 2 https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5373 3 https://thehill.com/homenews/administration/3625876-white-house-asks-congress-for-13-7b-in-ukraine- related-funding/ Sep 02, 2022 Page 10 of 37 percent in Lvivska oblast, and goes down to fully remote modality in Donetska or Kharkivska oblasts. 12. This Third AF provides emergency support to Ukraine during the war - as part of the World Bank Group (WBG) Response to the Global Impacts of the War in Ukraine – A Proposed Roadmap - and supports the priority themes under the WBG Strategy for Fragility, Conflict, and Violence 2020-2025 (Report No. 146551). The Third AF, consistent with the parent project, is a core element of the initial fast- track response under the strategic framework for the WBG on Global Impacts of the War in Ukraine. It supports both short-medium and long-term considerations outlined in the Proposed Roadmap presented by Bank management to the Bank’s board on April 12, 2022, the first dimension of which is increased support to Ukraine, including through financing sizeable non-military expenditure needs. Sep 02, 2022 Page 11 of 37 Table 1. Estimated Eligible Government Expenses, US$ million equivalent Estimated government March April May June July August September October November December Total expenses Government employees’ 140 140 140 140 120 120 120 120 120 120 1,280.00 wages School employees’ wages 197 198 198 210 200 200 180 180 180 180 1,923.00 Transfer from budget for 539 539 458 600 500 500 500 500 500 500 5,136.00 pensions (MOF projection) IDPs payments 5.8 132 209 200 160 160 160 160 160 160 1,506.80 GMI +HUS +Disabilities 260 267 169 105 110 110 110 110 110 110 1,461.00 PMG 250 250 250 250 200 200 200 200 200 200 2,200.00 First responders’ wages 83 83 83 83 70 70 70 70 70 70 752.00 TOTAL 1474.8 1609 1507 1588 1360 1360 1340 1340 1340 1340 14,258.80 Out of which covered under: Original PEACE (IBRD/IDA) 472 115 100 200 200 200 200 5 1492 Total First AF (US funds 341 350 350 259 - - - - 1,300 MDTF2) Second AF: Pensions 539 539 458 600 600 - 2736 IDPs payments 0 0 209 200 115 - 609 GMI +HUS +Disabilities 205 205 169 100 61 - 740 PMG 0 0 0 0 0 - 10 First responders’ wages 83 83 83 83 73 95 405 Total Second AF 827 827 919 983 944 95 4,500 Total Third AF - - - - - 529.9 - - - 529.9 Note: The exact figures could change depending on exchange rate fluctuations and seasonal variations related to specific government programs. Sep 02, 2022 Page 12 of 37 II. DESCRIPTION OF ADDITIONAL FINANCING 13. The PDO will remain the same as originally stated: to contribute to sustaining the government administrative and service delivery capacity to exercise core government functions at the national and regional levels. The Third AF will reimburse eligible expenditures from Components 2 and 3 of the project, which were introduced during the second AF to cover pensions and social assistance payments; and the payment of healthcare workers’ wages and first responders’ salaries, respectively. The expenditure types under these components are spelled out in Table 2. The components of the project are not changed. The achievement of the PDO supports the Ministry of Finance’s (MoF) objective of stable implementation of the State budget policy. 14. The results framework of the project will not change. The parent project already envisaged that with partial reimbursement of the wage bill, the Government would be able to pay all salaries of employees on the payroll in school and government ministries, department, and agencies at the central and subnational levels. Given the continuation of the war, which continues to put pressure on the government fiscal situation, additional support will ensure salaries of those employees continue being paid. Consistent with the three-month extension, the end targets of the result indicators will be extended to June 30, 2023. 15. The Third AF will use the design of the parent project, relying on country systems and strengthened social, environmental, and fiduciary arrangements when needed and practical. As a result, the Third AF will support financing eligible government expenses based on government delivery systems. The Third AF will be implemented based on the Project Operational Manual of the parent project, which will be updated within one month of effectiveness of the AF loan agreement as appropriate to reflect the additional financing. 16. Government spending on core public services for the duration of the PEACE Project is vast and remains considerably larger than the amount of financing available. The parent project was going to provide funding to partially cover the wages of a subset of public sector workers – government and school employees- from March to November 2022 and had identified additional expenditures of US$550 million. The first AF scaled up funding up to 100 percent of the government and school employees wage bill in March to July 2022, covering these expenditures. At the same time, given the deteriorating fiscal situation it was noted that it would be important to continue funding the wage bill after July 2022, justifying additional spending of around US$550 million until November 2022. Given the difficult fiscal situation and potential future contributions of development partners to the MDTF, the Second AF identified US$1.65 billion of eligible expenditures as financing gap. Third AF covers US$529.9 million of these expenditures following the Second AF. The proposed extension of the project’s closing date by three months would add around US$3 billion of new uncovered expenditures, bringing financing gap to be covered through future donor contributions to US$4.7 billion. The closing date extension is justified based on the significant financing needs that would likely persist into the 2023 and the need to preserve the core government capacity and the provision of essential services and social payments to minimize human capital losses and facilitate reconstruction. Third AF creates a space to bring in new funding from development partners to support continuity of government core functions until June 2023. Sep 02, 2022 Page 13 of 37 Table 2. Government Program Supported by the Third AF Line item Government School Pensions GMI HUS Transfers to IDP PMG First employees’ employees’ payments payments persons payments responders salaries salaries with wages disabilities Component 1 Component 2 Component 3 Nature of Salaries of Salaries of Will Social Social Social Grants to Wage bill Wages of program non-security school finance assistance assistance to assistance internally part of State sector employees pensions for low- compensate for persons displaced prospective Emergency government at the local up to an income payment of with persons payments Service employees level in the amount individuals utility bills disabilities, to hospitals staff portion subsidize and low except for and clinics funded d from income payments to for health through the families individuals service education Central who live in delivery subvention Governm social from the ent institutions central Budget budget Approxim ~US$120 ~US$180 ~US$500 ~ US$32 ~US$50 ~US$24 ~US$160 ~US$200 ~US$70 ate million million million million per million per million per million per million per million per monthly per month month month month month month cost of month program Note: The exact figures could change depending on exchange rate fluctuations and seasonal variations related to specific government programs. Sep 02, 2022 Page 14 of 37 III. KEY RISKS 17. The Third AF does not change the overall risk rating of the Project, which remains High due to the ongoing war, with widespread and unpredictable security, combined with political, social, and macroeconomic instability. The Environmental and Social risk, Sector Strategies and Policies risk, the Institutional Capacity for Implementation and Sustainability risk, and the Stakeholders’ risk associated with the implementation of the Second AF remain as Substantial for this Third AF. Political and Governance, Macroeconomic and Fiduciary risks remain as High as discussed below. 18. Political and Governance risk is High. The ongoing war and the declared state of emergency, pose a major risk to the political and governance landscape. At the time of preparing this operation, the conflict appeared to be concentrated in and around the eastern part of the country, but its evolution and the potential impact on the ability of the Government to perform core functions remains highly uncertain as the war continues. 19. Macroeconomic risk is High. Rising geopolitical tensions and the ongoing war have led to a severe deterioration of the macroeconomic situation in the country. Macroeconomic and financing pressures have intensified, and conditions continue to worsen. Disruptions to economic activity and the resulting decline in tax revenue are constraining fiscal space at a time when the spending pressure on the government to provide essential services and repair damaged infrastructure is increasing. Ukraine is not currently able to borrow externally from the market, and the ability of its domestic market to absorb additional government debt is limited. Given the severe contraction in the economy, and amid weak tax collection, the Government is faced with the difficult financial decision of whether to fully fund other activities (including emergency restoration of critical infrastructure) at the cost of reducing key social services, or to not fully pay out wages and pensions in the near term. Either of these choices would have a significant impact on the welfare of people of Ukraine. The NBU could serve as a lender of last resort to monetize the emerging fiscal financing gap; however, the ensuing inflationary pressures will result in significant welfare losses for the most vulnerable people, significantly delay the economic recovery and risk undermining economic stability in the medium term. With large-scale monetization of the deficit or a sharp drawdown of foreign exchange reserves (with a subsequent sharper decline in the exchange rate), already high inflation can be expected to spike which would continue to erode the purchasing power of low- and middle-income households because of significant direct pass-through effects and inflationary expectations. Inflation increased from 10 percent yoy in January 2022 to 22.2 percent in July, while food and fuel prices surged even higher by 28.9 and 77.7 percent yoy respectively. Both options, cutting expenditures and deficit monetization, coming at great current costs to the population and compromising future recovery as poverty rates could climb further to levels not seen since the early 2000s. The proposed Third AF contributes to mitigating macroeconomic risks by helping the GoU to mobilize much needed financial resources to honor its now bare-bones social expenditures, limit irrevocable damage to Ukrainians’ living standards, and restore and rehabilitate Ukrainians’ personal incomes and opportunities by sustaining the purchasing power of families for their basic needs. However, even with significant Bank financing and the development partners’ pledge to continue supporting Ukraine, the country’s financial needs are enormous, and will remain so in the foreseeable future. 20. Sector Strategies and Policies risk is Substantial. The Government has been implementing public financial management and civil service reforms with support from the World Bank and other development partners since 2017 when the PFM Reform Strategy was approved. The World Bank analytical work has contributed the existing strategies and policies with Education Review of 2019, PEFA Assessment of 2019 Sep 02, 2022 Page 15 of 37 and subnational PEFA assessment of 2020. The Government’s commitment to the reform agenda is strong, and sector policies are not likely to change during the duration of the project; for example, the Human Resource Management Information system continues to be implemented under the World Bank project financed by the EU. However, without continuing external support, the war situation creates Substantial risks for maintaining the progress on PFM and civil service that has been achieved over the several years. 21. Institutional Capacity for Implementation and Sustainability risks are Substantial given the uncertainty about the evolution of the conflict and the damage it could cause to the currently resilient financial management, payment and banking systems. To mitigate the residual risk, the situation will be monitored closely and if needed existing procedures will be amended to facilitate the processing of salary payments in emergency circumstances. Moreover, even though the project maintains its basic design using country systems and electronic payments, the inclusion of additional expenditures in the Second AF in support of various government programs increased the technical and institutional capacity risks. MoF remains as the implementing agency as budget holder, but it must coordinate with Ministry of Health (MoH), SES, PFU and MoSP for verification and reporting, in addition to Ministry of Education and Science (MoES) for the parent project. Given the dire needs during the conflict, the team is seeking for opportunities to enhance MoF’s capacity for managing the project. 22. Fiduciary risk is High due to financial management risks. There is no procurement in the project (other than for the project audit) and public financial management (PFM) systems are still operating effectively in Ukraine. The project contemplates few disbursements, which are being done mostly as large reimbursements to the government’s treasury based on monthly reports of eligible expenditures already made. However, the war could affect PFM systems, and the frequency of payroll data reconciliation, especially as project implementation may extend out as far as the proposed new closing date of June 30, 2023. The World Bank team will closely monitor the situation with the MoF and, if needed, use manual reconciliation processes to ensure that government employees continue to be paid. The monthly structure of disbursement is expected to be viable even if some delays are experienced because the State Treasury Service currently reconciles the Treasury Single Account with the Government’s commercial bank accounts daily. Risks related to the financing of wages of regional public sector workers that are displaced, or those located in territories that are not under control of the Government due to the war with Russia, are mitigated by making payments directly into the bank accounts of workers - and only to workers who are Ukrainians. In a situation where the GoU loses complete control of a part of the territory, the Government will stop making payments to that region (as was done in 2014-2015 in Crimea and the occupied regions of Luhansk and Donetsk). 23. Social and Environmental risks are rated Substantial. Project activities are not expected to have any direct adverse environmental and social risks or impacts. The parent project Social and Environmental risk was rated as Moderate given that project activities take place within a highly volatile context beyond the immediate control of the implementing agency. The Second AF expanded the support to cover pensions, social payments and health services that are essential to mitigate the social and economic impact of the war. The social and environmental risk of the Second AF was rated as Substantial given potential for community and worker health and safety incidents associated with exposure to ongoing war fighting and aerial bombardment during the delivery of the social services supported by the Second AF and associated risks and impacts. Some services will require participants to attend in person activities and would require essential workers to staff their places of employment or conduct outreach activities potentially increasing their risk of exposure to attack especially in eastern parts of the country. This Sep 02, 2022 Page 16 of 37 contextual risk also increases the likelihood that vulnerable groups and individuals who may be eligible to receive such services do not seek them out for fear of exposure to war fighting and bombing. These are highly contextual and beyond the immediate control of the project and not caused by the activities supported by the Bank financing. Preventative measures for the newly introduced Second AF activities under emergency conditions are described in the project’s Environmental and Social Commitment Plan (ESCP) and POM. These include principles for information disclosure and consultation, and grievance redress mechanism (GRM). The Stakeholder Engagement Plan (SEP) for the project was revised to define principles for information disclosure and opportunity for feedback and access to redress for complaints and concerns for newly introduced Second AF supported activities. The Third AF will retain the same arrangements. 24. Stakeholders’ risk associated with the implementation of the Project is rated as Substantial. Project implementation success depends on personnel management by line ministries and agencies, and commercial banks remaining in operation for the duration of the conflict. As mentioned in paragraph 8, the Ukrainian banking system entered the war in good shape and the electronic payment system remains functional in Ukraine. Large retail networks and gas stations still accept cards, and cash back operations through POS terminals as an alternative to ATMs in case they are damaged (with a limit of UAH 6000 per one withdrawal) have been facilitated. The MoF and the Bank will closely monitor any disruption caused to commercial banks and/or related payment systems. To avoid disputes on payments and payroll list, existing grievance redress mechanisms and the information disclosure policy of the Government, strengthened through the ESCP as needed, will be used. Project implementation also depends on financial intermediaries – the PFU manages payment of pensions through its account in Oshchadbank – a state owned bank (the Treasury transfers money from the Single Treasury Account to the PFU’s account in Oshchadbank, while the PFU finances pensions from that account to individual accounts of beneficiaries). While the Ukrainian banking system entered the war on solid grounds, the conflict is expected to affect banks’ asset quality and solvency. Recent amendments introduced a blanket guarantee for retail deposits and brought Oschadbank under the deposit guarantee system. At the same time, loss of assets, collateral, and revenues will severely affect banks' profitability and solvency. IV. APPRAISAL SUMMARY A. Economic and Financial (if applicable) Analysis 25. The Third AF will further expand the project’s benefits in mitigating the humanitarian crisis and its impact on human capital. The toll of destruction, damage, and dislocation in Ukraine from the war continues to grow. As of July 8, more than 6.8 million people (about half of whom are children) had become refugees and about 6.6 million people had been displaced internally4 and double that number were estimated to be need of life-saving humanitarian assistance, with food and essential services severely constrained in the areas affected by the fighting and a third of displaced households reporting no income. In addition to loss of life and human suffering, the Russian invasion has crippled Ukraine’s economy with large adverse social and poverty impacts. Latest WB estimates suggest that poverty, based on the upper middle-income poverty line of US$5.5 per person per day, is projected to increase tenfold from a low base, with the share of the population below the poverty line increasing from 2 percent in 2021 to 21 percent in 2022. Poverty rates in regions most affected by the war are expected to increase 4 IOM estimate (displacement.iom.int). Sep 02, 2022 Page 17 of 37 much more. Therefore, providing additional funding for pensions, social payments and healthcare will help the government to provide support to the most vulnerable groups, such as elderly, families with kids, and persons with disabilities. 26. The Third AF will also further support the project’s indirect benefits of preserving human capital and reducing the risk for the country to fall into the fragility trap, maintaining trust in the Government’s capacity to deliver basic services during the war. The war resulted in a significant decline in fiscal revenues. Expenditures were cut significantly (including capital expenditures by almost 90 percent) and reduced only to the most critical social items, but despite this, revenues are projected to cover only around 60 percent of non-military expenditure in 2022. Tax and non-tax revenues will remain depressed for the foreseeable future, during and for a period after the war. However, critical public social expenditures are still on the rise due to active military conflict. With intensified combat in the south-east part of the country, central government expenditures on social programs increased in June by more than 50 percent month-over-month largely due to one-off payments to internally displaced people. Thus, it is critical to support government in ensuring public service functions in meeting the basic needs of the population to be maintained. B. Technical 27. Overall, the status of preparation is satisfactory, and the Third AF is ready for implementation. The project has performed well during its short duration, disbursements have been made under the first and second AF, and the Third AF will scale it up by providing more financing for the existing activities. The Third AF will use the implementation arrangements on project management, financial management and audits established under the parent project with the adjustments introduced through the Second AF on the new types of expenditure programs. However, one of the lessons learned during implementation is that absorbing the expanded project financing is a challenge for an already overstretched government during war time, due to the extensive verification required. The team is exploring opportunities to provide capacity enhancement support to the government for coordination, reporting and verification. 28. The governance and institutional arrangements of the PEACE project are designed to fit the current circumstances by using government processes where possible and ensuring the least additional administrative burden on the Government. The first verification reports for March-May 2022 and for June 2022 were submitted by the MoF under the parent project and the first AF, and these reports were found satisfactory by the Bank. The Third AF will keep the project’s arrangements, relying on the existing country system procedures which were deemed as satisfactory before the crisis and have continued to function during wartime. 29. The Ministry of Finance of Ukraine remains the Implementing Agency of the project. The appointed Project Coordinator (Deputy Minister) oversees project implementation, monitors progress, and ensures prompt delivery and reporting on project indicators. The Project Coordinator also acts as a focal point for communication with the World Bank team on project-related issues. 30. The Project Operational Manual (POM) prepared under the Parent Project and updated under the Second AF will be used for the Third AF. The POM reflects institutional arrangements and verification mechanisms for all types of eligible expenditures. The POM lays out the project’s overall operating, fiduciary, verification protocols, decision-making procedures, eligibility criteria, and results monitoring arrangements in line with applicable World Bank policies. The POM will be updated within one month Sep 02, 2022 Page 18 of 37 after the effectiveness of the Third AF to reflect minor changes related to the increased project amount. 31. Monitoring and Evaluation system. For monitoring, the project relies on data from the GoU, including that of the State Treasury System (STS). The MoF monitors this data monthly and reports on project results (including PDO indicators and intermediate result indicators), which the World Bank team reviews as part of its project monitoring. The project mainly uses existing arrangements within the GoU, and ongoing coordination within the MoF, MoH, NHSU and MoSP with the STS and ministries, agencies, and state and rayon oblast administrations. The MoF and coordinating ministries ensure that the collection and processing of personal data5 is managed under applicable national law with a view to ensuring the legitimate, appropriate and proportionate use of such data in accordance with best practice. 32. Implementation Arrangements. Section E describes the verification arrangements per type of expenditure, which remain as described in the Project Paper for the Second AF. Given the dire needs during the conflict and that the additional categories of expenditure makes coordination considerably more difficult, the team is exploring opportunities to provide enhanced support to the MoF for coordination, verification and reporting. C. Financial Management 33. The PFM system continues to be reliable. Financial controls including commitments and payments continue to be functional during the war, and social benefits and pensions have been paid during February-June 2022. The controls on these payments are sound, ensuring that even during the war, relevant records are updated. MoF relies on its existing system for planning and execution of eligible government expenditures that are financed by this Project. MoF is tasked with consolidating, reviewing, and submitting monthly reports on social assistance, pensions and PMG expenditures to be reimbursed by the project. For social assistance, the MoF is reconciling treasury payment data with verification of social assistance payments and IDP program payments made by MoSP. For the pensions, the verification only ensures that funds are transferred from the Treasury to the PFU. The PFU provides a monthly report on all pensions paid in Ukraine. For PMG, the NHSU provides information on payments to healthcare facilities and verifies that payments have reached all the facilities. The NHSU collects information on healthcare worker salary payments under PMG from healthcare facilities and submits the report to the MoF for consolidation. 34. Given the war’s potential effect on PFM institutions and processes, additional fiduciary arrangements have been put in place for this operation. In addition to the government’s own verification processes, monthly government reports submitted for reimbursement under the project are reviewed by the World Bank task team prior to processing respective disbursements. 35. The scope of the audit will be as contemplated under the parent project, as expanded for the second AF. The independent audit of the eligible expenditures will go beyond the regular audit of financial statements, to include tests to verify the eligibility of project expenditures. It is expected that an independent and experienced auditor acceptable to the World Bank would carry out the financial audit, 5 “Personal Data” means any information relating to an identified or identifiable individual. An identifiable individual is one who can be identified by reasonable means, directly or indirectly, by reference to an attribute or combination of attributes within the data, or combination of the data with other available information. Attributes that can be used to identify an identifiable individual include, but are not limited to, name, identification number, location data, online identifier, metadata and factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of an individual. Sep 02, 2022 Page 19 of 37 along with additional assurance procedures with respect to the eligible expenditures for the entire period that is financed by the Project, in line with the Terms of Reference agreed with the World Bank. The financial auditor will take into consideration any financial reviews, such as special purpose audits, that may be carried out during project implementation. 36. As in the original project and first two AFs, the Third AF disbursements will be based on withdrawal applications submitted monthly by the MoF. The third AF will only finance expenditures incurred on or after August 1, 2022. Withdrawal applications would be supported by the monthly report(s) on actual eligible expenditures incurred for the past month(s), reconciled to State Treasury records and reviewed by the World Bank. Disbursements will be made by the World Bank to a segregated US Dollar denominated account of the state treasury in the NBU that would be indicated by the Government, and then converted and credited to the government State Treasury account in UAH. It is expected that a significant portion of this Third AF will be disbursed as retroactive financing. D. Procurement 37. There are no procurement processes envisaged under the Third AF. The audit will be financed under the original Bank financing. E. Verification 36. The following explains verification procedures in different expenditure areas, for the project as a whole. As noted previously, this third AF could potentially finance expenditures in any of these areas. Verification of the Pensions 37. The MoF verifies that transfers from the central budget have reached the PFU, based on Treasury data. The amount of these transfers constitutes the eligible expenditure under this project. In addition, the PFU submits a report verifying that pensions were paid for the entire population of pensioners. The PFU report is expected on every 15th day of the month that follows the reporting month. In cases when the Pensions could not be delivered through Ukrposhta in several regions where fighting occurs, this would be reflected in the report. The Project is not able to link the project’s funds to specific pensions paid, but it includes an indicator in its revised results framework, for the timely payment of pension benefits. The pensions paid are expected to exceed the transfers from the central government budget to the PFU. Verification of the SSN Payments 38. The MoF verifies payments based on the Treasury data, the MoSP provides verification of the spending on four selected SSN programs. The MoSP report for each program is based on the MoSP spending report that was verified in most regions and presented as expenditure per oblast. A verified spending report becomes available on every 10th day of the month that follows the reporting month. There is potential difficulty with the verification of spending on SSN programs in several regions where fighting occurs. In these regions, verification is executed by the MoSP through the Oshchadbank that reports to the MoSP on the total amount spent on the program. IDP program verification is done by the MoSP through the Oshchadbank statements. Sep 02, 2022 Page 20 of 37 Verification of the Health Workers Salaries under PMG Payments 39. The MoF verifies payments to the PMG program based on the Treasury data. The NHSU verifies payments to healthcare providers and collects monthly reports on salary payment from each healthcare provider. While expenditures at the healthcare provider level are not done through the Treasury Single Account, the project reconciles the data collected and reimburse wage bill expenditures funded under the PMG. The MoF consolidates the verification report based on all sources of data. Verification of the First Responders’, Government and School Employees Salaries 40. The MoF verifies payments of salaries of the Government and SES staff based on the Treasury data and payroll data of each ministry, department and agency . MoF uses Treasury data and reconciles with the payroll data of the SES. The MoF consolidates the verification report based on all sources of data. 41. The MoF verifies payments of salaries of the school employees based on the Treasury data and payroll collected by the Ministry of Education and Science (MoES) from individual schools. MoF reconciles payroll data in the MoES report to Treasury data. The MoF consolidates the verification report based on all sources of data. F. Legal Operational Policies . Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No . Sep 02, 2022 Page 21 of 37 G. Environmental and Social Social 42. The activities supported by the Project are not expected to have any direct adverse social risks or impacts, but they take place within a highly volatile context beyond the immediate control of the implementing agency. The proposed Third AF will continue to fund expenditures identified in the parent project and the Second AF. 43. The scope of the project results in substantial social risks arising from potential safety and health incidents associated with exposure to the war and aerial bombardment during delivery of services. The original project provided funding to the wage bill of non-security sector government employees and school employees who are integral for ensuring continuity of core government services (mainly public administration and education services) and preventing erosion of learning outcomes. The Second AF expanded this support to cover pensions, social payments and health and emergency services that are essential to mitigate the social and economic impact of the war. The social risk is substantial given the potential for community and worker health and safety incidents during the delivery of the social services supported by the Third AF and associated risks and impacts. Some services will require participants to attend in person activities and would require essential workers to staff their places of employment or conduct outreach activities potentially increasing their risk of exposure to attack, especially in eastern parts of the country. This contextual risk also increases the likelihood that vulnerable groups and individuals who may be eligible to receive such services do not seek them out for fear of exposure to war fighting and bombing. These are highly contextual and beyond the immediate control of the project and not caused by the activities supported by the bank financing. Preventative measures for the Third AF activities under emergency conditions are already described in the project’s ESCP and POM. These include principles for information disclosure and consultation, and GRM. The SEP for the project was revised during the Second AF to define principles for information disclosure and opportunity for feedback and access to redress for complaints and concerns for newly introduced Second AF supported activities. 44. Data collection and processing. Personal data are likely to be collected and processed in connection with Project activities, particularly in the case of social benefits payments. This may include the processing of sensitive data (including biometrics), which are collected and managed by the MoSP under their existing social assistance programs to support the identification (to determine uniqueness) and authentication (determining that the person eligible to receive the cash transfer is in fact the person they say they are). Ukraine currently has a data protection law of general application (Law No. 2297 VI 'On Personal Data Protection' as of June 1, 2010) that essentially meets international standards, albeit is in the process of being updated. Since 2014, the Ukrainian Parliament's Commissioner for Human Rights (Ombudsman) is the state authority in charge of overseeing compliance with the data protection law. 45. In order to guard against abuse of this data, Project activities are implemented in accordance with the applicable national legal framework and good international practices for dealing with such data in such circumstances. Such measures include complying with use limitations (data are only used for legitimate and related purposes to the disbursement of cash transfers), data minimization principles (only collecting and processing the data that is necessary for the legitimate purpose), limits on data retention (retaining the data only for as long as they are necessary), where practicable informing individual data subjects of how their data is used and processed, and allowing data subjects the opportunity to correct information about them and seek redress for abuse of these provisions, etc. Additional technical and Sep 02, 2022 Page 22 of 37 organizational measures should be taken to ensure the protection of personal data against unlawful processing (loss, unlawful or accidental elimination) and unauthorized access, including by third parties. Gender 46. The war in Ukraine exacerbated vulnerabilities and heightened economic, social, and health risks for women and girls. The full-scale invasion causes civilian casualties and destruction of civilian infrastructure, forcing people to flee their homes seeking safety, protection, and assistance. The Office of the United Nations High Commissioner for Human Rights recorded 10,631 civilian casualties in Ukraine as of June 26, including 5,663 deaths and 8,055 injuries. The gender impact of the armed conflict depends on the country's demographic profile, which includes large numbers of older women, women and girls with disability, as well as internally displaced and refugee women and girls. Since the onset of the Russian invasion, nearly one-third of Ukrainians have been forced from their homes. Over 6.6 million people have been displaced within Ukraine, 65 percent of whom are women. Seventy-seven percent of IDP households contain at least one boy, and 84 percent have at least one girl between the ages of 5 and 18. An estimated 5 million people have fled their homes to the neighboring countries. Ninety percent of refugees are women and children, while most men aged 18–60 are required to stay behind under martial law. Ukraine has a large number of people with disabilities (over 2.7 million), of whom more than one million are women and girls. Rapid Gender Analysis conducted by the UN Women and CARE revealed that women are facing immense hardship when it comes to health, safety, and access to food as a result of the war. 47. Access to social protection is critical for mitigating the vulnerabilities of women and their families. Women are disproportionally affected by the crisis. They experience heightened economic stress caused by the double burden of the house- and care-work and limited financial resources. Women constitute 54 percent of the population and 71 percent of all heads of households are female. During the war, many women were left to care for their families on their own, including by being responsible for earning an income for their household. This can be due to their husband being unemployed, conscripted, or deceased or due to family separation. For many women, social assistance or pension is the only source or the largest share of income. Women represent most pensioners and SSN beneficiaries supported by the proposed Second AF, including 68 percent of the GMI program beneficiaries, 62 percent of the HUS beneficiaries, and over 67 percent of the IDP assistance beneficiaries. Out of 10.8 million pensioners, around 64 percent are women. Given the growing number of the newly low income and vulnerable women, the financing of pensions, social assistance for IDPs, persons with disabilities since childhood and children with disability, as well as GMI and HUS programs, provided under the Second AF is critical to ensure their food security, safety, and continuity of health care and social services. Citizen Engagement 48. Despite the difficult operating environment, the Second AF has prepared the SEP and expanded the parent project’s GRM to cover beneficiaries of additional types of expenditures and therefore are equipped to cover the Third AF expenditures. The project’s GRM, which is not limited to safeguards, will allow for two-way communication between citizens and the government and will establish multiple channels to receive not only grievances but also feedback from citizens. The project will rely on existing communication channels maintained by the Government, including those by the MoES, the MoH, and the MoSP. Pensioners and beneficiaries of all SSN programs, including GMI, HUS, social assistance for the IDPs, and social assistance for persons with disabilities since childhood and children with disability, can use the multi-channel GRM operated by the MoSP. The MoSP maintains an easily accessible GRM with functions, Sep 02, 2022 Page 23 of 37 staffing, and resources, enabling stakeholders to submit complaints, information requests, suggestions, and feedback through various channels (phone, email, physical mail, online, and during visits). Grievances can be submitted in-person in the Public Reception Office of the MoSP. The MoSP discloses semi-annual GRM performance reports on its website. The ‘15-45’ Government Hotline can be used to submit complaints and other types of appeals related to social assistance and pension provision and the ’15-39’ hotline for beneficiaries of social assistance programs and persons with disability. Pensioners can use the same channels as other social protection beneficiaries. According to the GRM report disclosed by the MoSP, 31.1 percent of all grievances/information requests received in 2021 were related to pensions. Currently, PFU continues to operate its regional offices and more than 470 local service delivery centers/units - located in the government-controlled areas of Ukraine. Pensioners can submit complaints, information requests, suggestions, etc. in these centers/units or use the other channels (website, mobile applications, PFU hotline, email). The Beneficiary Feedback indicator from the Parent Project will be used (Percentage of Grievances addressed) and capture grievances across types of expenditures covered under Parent Project, First and Second AFs. 49. Government employees will remain subject to the terms and conditions of their existing employment arrangements and civil service grievance redress. Principles for protecting against harmful labor, child labor and security forces activities are also described in the ESCP, including ensuring access to service providers responding to sensitive incidents such as those related to Sexual Exploitation and Abuse/Sexual Harassment and other forms of violence that may be associated with the invasion context. Labor risks will be addressed through the Client’s commitment in the ESCP, and clear guidance provided in the POM to comply with the relevant requirements of ESS2. The existing civil service GRM is governed by a legal framework comprising the Labor Code, Civil Service Law, and statutes of government agencies and covers all human resource related issues including payroll. The complaints are handled by the employer, NACS, and if not resolved could be escalated to courts. Environment 50. The Third AF will not support physical works or envisage any other kind of activities that may cause direct or indirect environmental impacts. The environmental rating is moderate given potential for community and worker health and safety incidents during the delivery of the social services supported by the Third AF and associated risks and impact. Climate Change 51. Climate risk screening has been conducted for the expanded scope under the Second AF, covering all the types of expenditures contemplated under the Third AF . The nature of this operation limits its potential to directly support climate action as requested by WBG’s corporate commitments on climate. Ukraine is at risk of hydrometeorological hazards and natural disasters such as droughts, high temperatures, heat waves, wildfires, soil erosion, mudflows, extreme precipitation and flooding, which primarily affect the sectors of agriculture, water resources, energy, transportation, health, the urban environment and forests. Due to climate change, Ukraine has been experiencing an increase in the frequency and severity of natural disasters (such as droughts and floods) - causing in many cases, fatalities and leading to significant economic losses. Given the nature of the proposed second AF, climate resilience-enhancing measures are not prioritized in the project design. However, by helping to sustain the Government functions, this operation supports the efforts to maintain the expertise and human resources that were engaged in the implementation of the ambitious climate action strategies and action plans of Ukraine. These resources will Sep 02, 2022 Page 24 of 37 play a crucial role in integrating climate action in future reconstruction programs and will enable the continuation of Ukraine’s climate action strategies and action plans after the war. V. WORLD BANK GRIEVANCE REDRESS Grievance Redress. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. Sep 02, 2022 Page 25 of 37 VI SUMMARY TABLE OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Implementing Agency ✔ Project's Development Objectives ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ VII DETAILED CHANGE(S) COMPONENTS Current Component Name Current Cost Action Proposed Component Proposed Cost (US$, (US$, millions) Name millions) Social Assistance and 4,085.00 Revised Social Assistance and 4,585.00 Pensions Pensions Healthcare and First 415.00 Revised Healthcare and First 444.90 Responders Responders Support to government and 2,791.60 Support to government 2,791.60 school employees wage bill and school employees wage bill Audit expenses 0.40 Audit expenses 0.40 Sep 02, 2022 Page 26 of 37 TOTAL 7,292.00 7,821.90 LOAN CLOSING DATE(S) Ln/Cr/Tf Status Original Closing Current Proposed Proposed Deadline Closing(s) Closing for Withdrawal Applications IBRD-94030 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 IBRD-94040 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 IBRD-94050 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 IBRD-94060 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 IDA-71530 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 TF-B9038 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 TF-B9348 Effective 31-Mar-2023 31-Mar-2023 30-Jun-2023 30-Oct-2023 Expected Disbursements (in US$) DISBURSTBL Fiscal Year Annual Cumulative 2022 1,772,642,302.32 1,772,642,302.32 2023 5,519,000,000.00 7,291,642,302.32 SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Latest ISR Rating Current Rating Political and Governance  High  High Macroeconomic  High  High Sector Strategies and Policies  Substantial  Substantial Technical Design of Project or Program  Substantial  Substantial Institutional Capacity for Implementation and  Substantial  Substantial Sustainability Fiduciary  High  High Environment and Social  Substantial  Substantial Stakeholders  Substantial  Substantial Other 2, 2022 P Overall  High  High LEGAL COVENANTS2 LEGAL COVENANTS – Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Sections and Description No later than one (1) month after the Effective Date, the Borrower shall update the POM in form and substance acceptable to the Bank, containing detailed implementation and institutional arrangements for the Project; including, inter alia: (i) procurement; (ii) financial management and accounting; (iii) monitoring and evaluation; (iv) eligibility criteria for the selection of Eligible Employees under Part 1.(a) of the Project; (v) verification protocols and procedures for payment of Salaries of Eligible Employees; (vi) eligibility criteria, amounts and procedures for monthly pension payments and payments under the GMI Program, HUS Program, Disability Program, and IDP Program under Part 2 of the Project; (vii) eligibility criteria, amount and procedures for PMG Payments and payment of Salaries of Eligible First Responders under Part 3 of the Project; (viii) grievance mechanism for the Project; (ix) personal data collection and processing in accordance with applicable national law and good international practice; and (x) such other technical, administrative, fiduciary or coordination arrangements as may be necessary to ensure effective Project implementation. Conditions Type Financing source Description Disbursement IBRD/IDA No withdrawal shall be made for payments made prior to the Signature Date, except that withdrawals up to an aggregate amount not to exceed $528,575,250 may be made for payments made prior to this date but on or after August 1, 2022, for Eligible Expenditures under Category(3). Type Financing source Description Disbursement IBRD/IDA Under Category (1), the Borrower has furnished evidence satisfactory to the Bank in accordance with the verification protocols set forth in the POM showing that the Salaries for Eligible Employees have been paid. Type Financing source Description Disbursement IBRD/IDA Under Category (3), the Borrower has furnished evidence satisfactory to the Bank in accordance with the verification protocols set forth in the POM, that payments under Category (3) above have been made. Type Financing source Description Disbursement IBRD/IDA Under Loan A, the Bank and the UK Guarantor have signed the UK Guarantee Agreement and the UK Guarantee Agreement has been delivered to the Bank and has become effective. 2, 2022 P Type Financing source Description Disbursement IBRD/IDA Under Loan B, the Bank and the Danish Guarantor have signed the Danish Guarantee Agreement and the Danish Guarantee Agreement has been delivered to the Bank and has become effective. 2, 2022 P The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) VIII. RESULTS FRAMEWORK AND MONITORING Note that the results indicators’ end-target will be extended to June 30, 2023, should the extension of the closing date be approved. Sep 02, 2022 Page 30 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Results Framework COUNTRY: Ukraine RESULT_NO_PDO Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine Project Development Objective(s) To contribute to sustaining the government administrative and service delivery capacity to exercise core government functions at the national and regional levels Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_ PD O Indicator Name PBC Baseline End Target Core government functions are maintained Government continues to exercise core functions (Number) 5.00 4.00 Action: This indicator has been Revised Number of public administration staff paid in non-security 160,000.00 At least 85% of staff paid in the baseline month sectors (Text) Action: This indicator has been Revised Number of female civil servants paid on time (Text) 110,000.00 At least 85% of staff paid in the baseline month Action: This indicator has been Revised Number of school employees paid on time (Text) 450,000.00 At least 85% of staff paid in the baseline month Action: This indicator has been Revised The number of female school employees paid on time (Text) 300,000.00 At least 85% of staff paid in the baseline month Sep 02, 2022 Page 31 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) RESULT_FRAME_TBL_ PD O Indicator Name PBC Baseline End Target Action: This indicator has been Revised Number of schools that remain operational (Number) 13,866.00 10,000.00 Action: This indicator has been Revised Share of pensions paid on time (Percentage) 100.00 90.00 Action: This indicator has been Revised Share of pensions paid to female pensioners (Percentage) 65.00 85.00 Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target Component 1: Government and School Employees Central and regional government staff in non-security sectors 100.00 Wage bill for October is paid with 70% paid on time. paid on time (Text) Action: This indicator has been Revised Percentage of Grievances Addressed (Percentage) 0.00 70.00 Sep 02, 2022 Page 32 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target Action: This indicator has been Revised Number of schools that remain operational (Number) 13,866.00 10,000.00 Action: This indicator has been Revised Component 2: Social Assistance and Pensions Social payments paid on time (Yes/No) No Yes Action: This indicator has been Revised Share of social payments paid on time to female beneficiaries 90.00 85.00 (Percentage) Action: This indicator has been Revised Component 3: Healthcare and First Responders Number of health service providers operational under the PMG (Number) 2,432.00 2,200.00 Rationale: Action: This indicator has been Revised This indicator will only measure public (municipal/comunal) service providers under operation, and not the private ones, given that project funding only reimburses salaries for public providers. Salaries of SES staff paid on time (Percentage) 100.00 85.00 Action: This indicator has been Revised IO Table SPACE Sep 02, 2022 Page 33 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Monitoring & Evaluation Plan: PDO Indicators Mapped Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Ministry of Finance, State Treasury Service, State Based on the Government continues to exercise core Once Tax Service, information provided by MoF functions Ministry of the MoF Justice, Minist ry of Social Policy Based on reports from Number of public administration staff Monthly. MoF, STS the treasury and key MoF paid in non-security sectors spending units. Based on information Number of female civil servants paid Once NACS MOF provided by NACS on time Based on the Treasury MoES and data on payments and Number of school employees paid on Monthly MoF STS reports MoES data on personnel time and payroll Based on data provided The number of female school Once MoES by the MoES and shared MoF employees paid on time through MoF reporting Number of schools that remain Quarterly MoES data Based on reporting of MoF operational MoES Sep 02, 2022 Page 34 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) The indicator will measure the government’s The data from the performance in making on- Monthly Pension Fund monthly Pension Fund MoF Share of pensions paid on time time pension payments reports. (i.e. share of pensions paid within the month when pensions are due). The indicator measures share of pensions paid on Pension Fund Share of pensions paid to female time to female pensioners. Quarterly MoF reports pensioners At least 85% paid on time within the month pensions are due. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Mapped Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Based on regular The Ministry Treasury reports and of Finance of payroll/personnel Ukraine, The Central and regional government staff in Monthly monthly reports MoF State Treasury non-security sectors paid on time submitted by the Key Service of Spending Agencies to Ukraine the MoF MoF/MoES Data from GRMs for Quarterly MoF Percentage of Grievances Addressed data school employees and government employees. Sep 02, 2022 Page 35 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Based on Number of schools that remain Number of schools that Quarterly reporting of MoF operational remain operational MoES The indicator will measure the government's performance in making on- time eligible social Monthly MoSP MOF Social payments paid on time payments (i.e. within the month when payments related to the identified social programs are due). Share of social payments paid on time to female beneficiaries Number of municipal (communal) health service providers operational under the PMG (baseline Number of health service providers 2,432 – target 2,200 operational under the PMG allowing for potential damage to healthcare infrastructure). SES and Monthly MoF Salaries of SES staff paid on time Treasury data ME IO Table SPACE Sep 02, 2022 Page 36 of 37 The World Bank Third Additional Financing for Public Expenditures for Administrative Capacity Endurance (PEACE) in Ukraine (P179875) Sep 02, 2022 Page 37 of 37